If you say Y here, you will get support for terminal devices with
display and keyboard devices. These are called "virtual" because you
can run several virtual terminals (also called virtual consoles) on
one physical terminal. This is rather useful, for example one
virtual terminal can collect system messages and warnings, another
one can be used for a text-mode user session, and a third could run
an X session, all in parallel. Switching between virtual terminals
is done with certain key combinations, usually Alt-<function key>.

The setterm command ("man setterm") can be used to change the
properties (such as colors or beeping) of a virtual terminal. The
man page console_codes(4) ("man console_codes") contains the special
character sequences that can be used to change those properties
directly. The fonts used on virtual terminals can be changed with
the setfont ("man setfont") command and the key bindings are defined
with the loadkeys ("man loadkeys") command.

You need at least one virtual terminal device in order to make use
of your keyboard and monitor. Therefore, only people configuring an
embedded system would want to say N here in order to save some
memory; the only way to log into such a system is then via a serial
or network connection.

If unsure, say Y, or else you won't be able to do much with your new
shiny Linux system :-)